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Editor’s Letter: The revolving door spins and spins

I’m not one to begrudge someone wanting to make more money.

If you’ve got the opportunity, go for it (as long as it’s legal). I want to state that right up front.

Having said that, I will add that something seems a little … unsavory about former regulators moving into the industries they once regulated.

At least two former Securities and Exchange Commission officials tasked with examining and investigating private equity firms joined the always-generous PE industry. They are Bruce Karpati, former chief enforcer in the SEC’s Asset Management Unit (which focuses on PE, among other asset classes), and Marshall Sprung, former enforcement co-head of that same SEC unit.

Karpati joined megapower Kohlberg Kravis Roberts in 2014 as chief compliance officer and counsel. He also worked at Prudential Investments as chief compliance officer after leaving the SEC in 2013. Sprung joined Blackstone Group as compliance chief in May, just seven months after Blackstone settled with the SEC for $39 million over charges of improper disclosure of certain fees and expenses.

I reached out to Blackstone and KKR Thursday but haven’t heard back. I’m curious about the advantages of having a former financial cop join your firm as compliance chief. I mean, I can guess, but I’d like to hear it from the actual firms.

Other former SEC officials who touched private equity have moved into the private sector as well, including former Asset Management Unit co-chiefs Julie Riewe and Robert Kaplan, who both joined law firm Debevoise & Plimpton as partners; and Andrew Bowden, former director of the SEC’s Office of Compliance Inspections and Examinations, who joined Jackson National Life Insurance Co as general counsel last year.

The Project on Government Oversight tracks movement of regulators into the regulated side of the market.

POGO reports that from 2001 to 2010, more than 400 SEC officials filed almost 2,000 disclosure forms that they planned to represent an employer or client before the agency, according to POGO’s website.

“The close linkage between the regulators and the regulated can influence the culture, the values, and the mindset of the agency — not to mention its regulatory and enforcement policies — both from the bottom up and from the top down,” according to POGO’s report. “…[When] so much of a regulatory agency’s world view can be shaped by the industry it oversees, consciously or otherwise, the public has reason to be concerned.”

The SEC has policies for former employees to prevent conflicts of interest. According to agency documents, former employees are permanently barred from representing other people before any government employee on issues the former SEC employees participated in.

Former SEC employees are also barred for two years after their jobs end from representing clients before the commission (unless they’d received proper clearance) or from representing others before government employees on issues that were pending during their government service within one year of termination.

Former SEC senior officers are barred for one year from the end of their jobs from representing others before any employee of the SEC, representing any foreign government before any U.S. department or agency, or aiding or advising the foreign entity.

There is, of course, another side to this argument.

Dan Gallagher, a former SEC commissioner who left last year and joined consultancy Patomak Global Partners, told CNBC that the revolving door of regulators moving to Wall Street is a positive move for everyone.

“People should be thrilled about a revolving door where people with expertise come in and out of the government,” he said in an interview last year. “It’s good for the private sector. It’s good for the government.”

And it’s happening in private equity, for better or worse. I’m not sure it’s for the better.